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Chapter 1 Notes

by: Maritt Nowak

Chapter 1 Notes IR 292

Maritt Nowak
GPA 3.47

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About this Document

These notes outline what I felt was important in the first assigned reading, chapter 1
Fundamental International Economics
James Baldwin
Class Notes
international relations, International Economics, Economics, Econ
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This 4 page Class Notes was uploaded by Maritt Nowak on Tuesday January 19, 2016. The Class Notes belongs to IR 292 at Boston University taught by James Baldwin in Spring 2016. Since its upload, it has received 28 views. For similar materials see Fundamental International Economics in INTERNATIONAL RELATIONS at Boston University.

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Date Created: 01/19/16
Fundamental International Economics Chapter 1 Notes The United States in a Global Economy Chapter Objectives: • How do economists measure international economic integration? • What are the three types of evidence that show trade supports economic growth? • What are the differences in international economic integration at the end of the nineteenth  century and today? • What are the major themes of international economics? Introduction: International Economic Integration • August 2007: crisis in the US housing market • by 2008: all high­income economies in distress • scarcity of credit • consumers cut back on spending • businesses cut back on investment • exceptions: China, India, major oil producers • Other examples: • Russian Crisis of 1998­99 • Asian Crisis of 97­98 • Mexican Crisis of 94­95 • Latin American Debt Crisis of 82­89 • Benefits of international integration: • technological innovation • cheaper products • investment in regions that lack local capital • BUT problems are contagious, thus there is a lot of controversy around international economic integration Elements of International Economic Integration • the major economies of the world are more integrated than ever, why? • instant communication • modern transportation • open trading systems • easy movement of goods • low cost movement of goods • 1950s­reduction of trade barriers after WWII • 1970s­ increased openness of capital markets • 1990s­ the internet • 1870­1913: transatlantic cables, steam­powered ships, railroads, etc. • 82.3% of US goods are produced domestically, 17.7% are imported (2011) • 1890: 92% of US goods produced domestically • 1914­1945 (WWI­Great Depression­WWII): manmade catastrophe de­integrate economies • borders closed to goods, capital, and people • How to measure the degree of integration: 1. trade flows 2. capital flows 3. people flows 4. similarity of prices The Growth of World Trade • world trade > world output • Gross domestic product (GDP): the market value of all final goods and services produced in a year inside a nation • Trade­to­GDP ratio: the ratio of exports plus imports to GDP; often used as an indicator of  the relative importance of international trade in a national economy • trade lessens between WWI and 1950 • pre WWI trade was mostly agricultural commodities and raw materials • today, trade is mostly manufactured consumer goods, machinery and equipment • today there is more international competition • rise of multinational corporations • telecommunications and transportation revolution Capital and Labor Mobility • labor is less mobile than it was in 1900 • Then: open door immigration • Now: passport controls, immigration visas, work permits, immigration policies • What caused the change: World Wars and Great Depression • how to measure capital flows 1 flows of capital through paper assets (stocks, bonds, currencies, bank accounts) 5. flows of capital through physical assets (real estate, factories, businesses) • Foreign direct investment (FDI): the purchase of physical assets such as real estate or  businesses by a foreign company or individual. It can be outward (citizens or businesses in  the home country purchase assets in a foreign country) or inward (foreigners purchase assets  in the home country). • savings and investment are highly correlated • technological improvements increase capital flows • investment opportunities in infrastructure • flows today are larger because economies are larger • more financial instruments are available now • more companies on the stock exchanges • international financial transactions used to be just buying and selling of stocks and bonds • countries used to have fixed exchange rates (less risk for firms) • firms today have to spend a lot on protection from changes in currency values • costs of foreign financial transactions is much less expensive today • transaction costs: the costs of gathering market information, arranging a market agreement  and enforcing the agreement. Includes legal, marketing and insurance costs, quality checks,  advertising, distribution, and after­sales service costs • international transaction costs are higher than local ones because of distance, cultural  differences, language barriers and negotiation of different laws Features of Contemporary International Economic Relations ­ higher trade­to­GDP ratio ­ labor is less mobile ­ capital is more mobile     deeper integration  ­ high­income countries=low barriers for imports ­ tariffs: taxes imposed on imports. Raise the price to domestic consumers and reduce  demand ­ quotas: limit on import volume ­ less restrictive tariffs and quotas ­ most countries have domestic policies that discourage international trade ­ labor regulations ­ environmental ­ consumer safety standards ­ investment location and performance ­ fair and unfair competition ­ “buy­national” programs ­ support policies for specific industries ­ shallow integration: elimination or reduction of tariffs, quotas and other barriers (i.e.  customs procedures) ­ deep integration: economic integration that changes domestic laws and regulations ­ high­tech goods are made of parts produced in multiple countries ­ trade negotiations are more difficult ­ more discussion of labor, environmental and other standards ­ concerns about national economies, employment and working conditions     mulitilateral organization  ­ IMF ­ World Bank ­ GATT ­ WTO ­ make rules, mediate disputes, solve problems     regional trade agreements   ­ increased in last 20 years ­ Regional trade agreement (RTA): agreements between 2 or more countries offering  preferential access to markets and deep integration ­ controversial ­ NAFTA ­ EU ­ MERCOSUR ­ APEC Trade and Economic Growth ­ lower prices and more choices ­ more competition ­ more funds available ­ risk of spreading financial crises ­ higher income for migrants ­ lower labor costs and better pool of skills ­ social tensions ­ institutions resolve disputes, but reduce national sovereignties ­ benefits of trade outweigh the costs ­ casual empirical evidence of historical experience ­ 1930s: countries shut out flows of goods, capital and labor (worsens Great Depression  and causes WWII) ­ East vs West Germany ­ North vs South Korea ­ pre­1980s mainland China vs Taiwan and Hong Kong ­ evidence based on economic models and deductive reasoning ­ increased innovation and competitive pressure = higher productivity levels and access to new technology and ideas ­ greater variety of goods at lower prices ­ evidence from statistical comparisons of countries ­ open economies grow faster Twelve Themes in International Economics 1. The Gains from Trade and New Trade Theory 2. Wages, Jobs, and Protection 3. Trade Deficits 4. Regional Trade Agreements 5. The Resolution of Trade Conflicts 6. The Role of International Institutions 7. Exchange Rates and the Macroeconomy 8. Financial Crises and Global Contagion 9. Capital Flows and the Debt of Developing Countries 10. Latin America and the World Economy 11. Export­Led Growth in East Asia 12. The Integration of the BRICs into the World Economy BRICs: Brazil, Russia, India and China. ­Jim O’Neil at Goldman Sachs, 2001. four large  economies with the potential to dramatically alter world trade and payments


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